Well, it looks like the Fed finally got a clue last week and slashed short-term interest rates. They must have bought a "u" or an "e." Their 75-basis-point fed funds rate cut now has them less behind the curve. After this week's 25- or 50-basis-point cut, they will be close to, or at, my expected 3% level. It's about time.
Now many are criticizing this Fed move as irresponsible or pandering to shareholders. They note the sloppy but hardly collapsing economic data and claim "bailout." Poppycock. The Fed has been behind the curve since the financial crisis began. All they are doing is following the fixed-income market lower. The more appropriate criticism of the Fed should be their tardiness.
Better Late Than Never
The Fed is not trying to save the stock market. It is not even trying to rescue the real economy. Right now, neither really need nor deserve saving. However, the Fed does need to aid the banking system with a more normal yield curve. It does need to mitigate the ugly residential housing bear market and rapidly fading commercial real estate market. It should help jump-start liquidity in the fixed-income markets. It probably wouldn't have an issue with the resumption of normal risk-taking in the financial markets as well.
The Fed is not bailing out anyone. The humongous losses in real estate and the debt-market bubbles, which the Fed helped create in the first place, have already occurred. The bloodletting in the financial services/real estate industry is only beginning. There are more write-offs and capital-raise announcements coming, so get over it.
The purpose of shockingly short rates is to insure against the actual debacle in the housing and debt markets from spreading into the real economy and causing economic Armageddon. The bears in the markets jeer this Fed action because they so desire a deflationary/recession spiral. Some are just talking their book, others believe in some moral cause to eradicate the evil that is leverage. But understand that those who criticize the Fed's moves want more financial pain. I don't. Short rates will help us avoid some pain.
They will not be panacea. Even with 2%-3% cash, the real estate markets will probably head lower, maybe even significantly. The banking system needs much more time to heal and recapitalize. The domestic consumer will continue the belt tightening and bump up their savings rate. We should experience below-average growth for a couple of years as the excesses in the financial and asset markets are worked off. But we don't need to have an economic implosion.
Incredibly low money rates will lower financing costs, stimulate investment and support consumption more than otherwise. They will add some support to the housing market and help stretched homeowners refinance their mortgages. Lower rates will aid purchases of consumer goods and services, supporting general economic activity. They are an insurance policy against the financial crisis dragging down the real economy. We should be so lucky as to have to reverse them sooner rather than later.
These positive forces will mitigate some of the negative pressures on the economy from the unwinding of the great debt bubble. They will not reflate the Great Stupidity, as I have termed it. The "still dancing fools" have had their legs removed permanently.
So ease up on the Fed. They were late, but better late...
So, Where Do You Put Your Money?
So what does all this mean for stocks? The decidedly mixed flow of news should result in continued volatility, but I believe with an upward bias. If the real economy holds, led by still-reasonable global growth, especially in long-lead-time energy and infrastructure investments, then the U.S. stocks market can work higher. There is still economic and market risk. But right now, much more economic doom is priced into cyclical shares than is visible.